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Weak economy complicates Stephen Harper’s new agenda

OTTAWA—The recovery that never really happened will complicate Prime Minister Stephen Harper’s efforts to put a fresh look on his two-year-old majority government in next month’s throne speech.

Ever since the end of the global recession, the Harper government has been expecting economic conditions in Canada to bounce back to post-recession levels.

But, though Canada survived the world economy’s swan dive better than most other industrialized countries, domestic growth has fallen short of the expectations cited by Finance Minister Jim Flaherty every year since 2008.

To protect Canadians from the global recession, the Harper government in 2009 launched an unprecedented economic pump-priming exercise that has seen Ottawa trying to repair its financial picture — this year it faces an $18-billion deficit — ever since.

The Bank of Canada also pulled out all stops to encourage post-recession economic growth, keeping borrowing costs at an historic low for three years. But weak economic conditions in the United States and Europe have gone a long way to nullifying the central bank’s efforts as well.

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The robust, 2.9 per cent economic growth that Canadians enjoyed the year before Harper moved into 24 Sussex now seems out of reach. In his 2012 budget, Flaherty cited predictions that Canada’s economy would reach 2.4 per cent expansion in 2013. But growth expectations this year have now been chopped to a mediocre 1.7-per cent range.

Unemployment, which stood at 6.6 per cent when the Conservatives took power, is now at 7.2 per cent, with 1.4 million out of work.

And the outlook is not upbeat as already-strapped consumers ease back on a spending spree that helped shore up the economy but at the same time ran up record levels of debt.

“It will be difficult to see growth — more than just moderate — over the next couple of years in Canada, given the consumer headwinds,” said BMO Capital Markets senior economist Sal Guatieri.

Flaherty says it’s unclear whether Canadian economic expansion will be above 2 per cent in the short-term.

“We live in a tenuous world. It’s a difficult world.,” he told CBC-TV after a two-day private sector think tank meeting this week. “Our recovery is solid, but it’s modest.”

Once the recession was over in 2010, the Harper government began to switch from pro-growth spending to a strategy of fiscal restraint based on $4 billion a year in spending cuts — all designed to eliminate the deficit before the 2015 election.

But, against today’s less-than-upbeat economic backdrop and entrenched unemployment, Canadians may be wondering what kind of economic strategy the Conservatives have in mind for the next few years. By briefly shutting down Parliament to prepare for a throne speech in October, Harper has given his government a chance to do a mid-term overhaul that could entail a fresh approach.

The government, however, has little room to manoeuvre if it is determined to wipe out the deficit in two years. The revenues needed to balance the books are being squeezed by the flat economy and Flaherty’s tax cuts, particularly the Goods and Services Tax reductions that deprive Ottawa of $14 billion a year.

And the 2015 deadline for balancing Ottawa’s books is crucial, because Harper has promised several popular tax breaks once the deficit is zapped. He is unlikely to want to face voters without being able to fulfill those pledges.

So Flaherty is warning that anyone who is hoping Ottawa might shift gears and engage in a program of economy-boosting spending will be disappointed.

“We’re on track, we are going to stay the course, we are going to balance the budget without doubt in 2015,” he recently told reporters. Flaherty says ending deficit-financing is the best protection for Canadians in case the economy goes into a deep slump.

Once Parliament resumes, the opposition NDP is certain to be hammering away at the Tories’ deficit-cutting focus.

“The government is on the wrong track. Our economy continues to underperform and we don’t have much to brag about when it comes to job-creation,” NDP finance critic Peggy Nash told the Star.

“And you can really trace the stagnation of the economy back to when they switched from stimulating the economy to an austerity approach.”

Nash said for the Conservatives it’s all about eliminating Ottawa’s budget shortfall so Harper can move ahead with the promised personal tax cuts in 2015. “Their approach is really being driven by politics more than sound economic policy.”

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